What can I use a bridging loan for?
When bridging loans were first introduced in the UK they were solely intended to help prevent chains breaking during the home move process, as outlined below. Today there are a whole host of scenarios in which bridging finance is used by property owners.
Preventing chain breaks
You’ve got your heart set on the new property you’ve found. The price has been agreed and you’re desperate to move in. However, the purchase of your current home has fallen through. You’ve been able to find another buyer but it’s going to take weeks before they’re in a position to complete on the purchase of your place. In this scenario you could consider using a bridging loan to buy a house, with the finance being quickly put in place giving you the short term mortgage that is needed to allow you to complete on your dream purchase without risking it falling through. Then, once the sale of your current place has completed you can pay off the bridging finance.
Buying an auction property
If you have successfully bought a property at auction you will often have just 28 days to complete on the transaction. You will have paid 10% deposit on the day of the auction and are legally bound to pay the remainder in the pre-determined timescale (we have occasionally seen auction lots with even less than 28 days to complete). If you don’t hold the remaining 90% required in cash then you either need to find a rich relative or need to arrange some form of short term property finance.
There are two main reasons why quick bridging loans are used for auction purchases. Firstly, they are typically much quicker than traditional mortgage applications. Unlike high street banks and building societies, bridging lenders are geared up to offer loans as quickly as possible, often in a matter of days. Secondly, auction properties are often in a condition which a traditional lender would not agree to lend upon. Again, bridging lenders are far more flexible and willing to lend on property that needs light or even major renovation works.
Cash flow for busy property investors
We often work with property investors that are juggling their finances because they are managing multiple projects, or are waiting on projects to complete to fund the next project. Sometimes investors find a property that they’re determined to purchase, either privately or at auction, but need to buy some time to release equity from their other properties. The short term flexibility that a bridging loan provides means that the investor can raise the funds to press ahead with the new purchase or renovation works. Bridging finance for developers and investors is a reliable way of seizing opportunities such as below market value properties that come up at auction, where speed is of the essence.
Business bridging loan
A business owner may be asset rich but needs some short term capital to pay invoices, pay for stock, or buy equipment. A business bridging loan can help the business stay liquid and ultimately be more profitable. However, a clear strategy to repay the bridging finance is important in every scenario, not least in this business bridging loan example.
Prevent Repossession Proceedings
If you’re in mortgage arrears and your property is going to be repossessed the property is likely to be sold under market value, as well as the cost of bridging loan and fees associated with repossession. It may be more beneficial to raise a bridging loan to pay off the mortgage lender to allow you time to sell the property at the open market value, and potentially leave you with more money in your hands. This scenario is only feasible if there is enough equity in the property both to pay back the existing lender as well as enough equity to provide the bridging lender with sufficient comfort that their loan, fees and interest will be covered.
VAT bridging loans
A more niche form of bridging lending is for a business to cover their unexpected or unprepared for VAT bill. This is often caused by a property or asset purchase. The business bridging loan can be used to bridge the HMRC VAT rebate which you know is coming. In effect the business owner will reassign the impending VAT reclamation to the bridging lender, so that the lender has security. They are also likely to hold a charge against a property.
Refurbishment of an uninhabitable property
You may see estate agents listing a property as ‘cash buyers only’. What they usually mean is that a traditional mortgage lender is not willing to lend on the property. That may be because of the construction type, or it may be because the general condition of the property deems it uninhabitable, in effect unmortgageable.
In order for a property to be deemed habitable it should meet fairly common criteria: the property has a functioning kitchen and bathroom, and is watertight i.e. the roof, windows and doors are in order and the property is secure. Mortgage lenders are also likely to want a surveyor to confirm that the heating and electrics are in place.
However, just because traditional lenders won’t mortgage these properties and agents are suggesting cash buyers only does not mean that you can’t raise finance against the building in its dilapidated condition. Br is a great loan for auction property because the bridging finance lender can provide the loan to enable you to buy the property, where a traditional lender would have rejected you The property investor then renovates the place so that it is in a habitable condition, so that it can be sold or refinanced on a traditional mortgage to redeem the bridging loan.
Bridging finance for property development
Aside from refurbishing the general condition of a property it may be beneficial to undertake major refurbishment of a property to increase its value or its profitability. If your project requires planning permission and building regulations approval this will require more funds and potentially delay completion of the project. A bridge can be an ideal source of finance to build a house and can be used to provide the necessary funds to aid the property developers cashflow.
Bridging to Purchase Land
Bridging finance for developers often takes the form of a short-term loan that is used to finance a ground up development. If the land doesn’t have planning permission then the flexible criteria of a bridging finance for land can be used to fund the purchase. Once planning permission has been granted, the land usually will have increased in value and we will be able to line up development finance that would be used to replace the more expensive bridging loan with a cheaper funding option.
Even if the landowner decides not to develop the land themselves they can sell the land with planning permission to pay back the bridging loan, hopefully having made a tidy profit from obtaining planning.
Leveraging against an existing portfolio
When taking bridging finance to buy property the mortgage is not always secured on the property you are purchasing. If you have plenty of equity in your own home or your investment properties you may find it quicker, easier and cheaper to leverage this equity.
Some lenders can work with you to offer a bridging facility which acts like an overdraft, which you can draw down on as and when you need it. This gives you the confidence to know how much funding is available to you allowing you to focus on finding the right land or property to invest in.
2nd charge bridging loan
A 2nd charge bridging loan is a short-term alternative when the current lender and traditional secured loan lender is unable to raise additional funds, whether that’s due to affordability, LTV limitations or even due to the reason for the loan.
This kind of specialist lending is one of the ways you might achieve ‘100% lending’. Raising additional finance in the form of a 2nd charge bridging loan is an option if you’re attempting to finance a project but don’t have a deposit.
For example, you want to use bridging finance to secure a £600,000 property. Given that your average bridging finance lender won’t let you borrow more than 75%, you need to find £150,000 in cash to put down as a deposit.
You don’t have 150 grand lying around, but you do hold assets with a good amount of equity. Providing you have sufficient equity in your security and a realistic exit plan, usually the sale of a property or refinance you can get a second bridging loan to raise the deposit against your security.